SPM Rides Downtrodden Mortgage Market

Dec 16 2008 | 4:56am ET

One mortgage hedge fund operator is reaping the benefits of a down real estate market while his hedge fund counterparts are struggling to keep their doors open until the New Year. 

Stamford, Conn.-based Structured Portfolio Management’s nine-month old Directional Mortgage Prepayment Strategy fund, which invests in various types of interest-only mortgage backed securities, is up 9.09% through October, according to public databases. The fund is managing $346 million as of the end of October.
 
“We believe that as a knock-on consequence of housing prices dropping and the imposition of extra fees and more constrained underwritings of mortgages in the prime mortgage sector, that the response on average of mortgagors to a rate incentive for refinancing is going to be substantially lower than it has been in the past,” Don Brownstein, SPM’s CEO and chief investment officer, told FINalternatives. 

“So we think there is money to be made by effectively taking positions which reflect that view about prepayments.”

Home values have dropped 8.4% year-over-year during the first three quarters of 2008, compared with the same period of 2007, according to real estate Web site Zillow.com. Some 11.7 million Americans now owe more on their mortgage balances than their homes are worth.

The Web site also says that U.S. homes will lose well over $2 trillion by the end of 2008; as of Sept. 30, $1.9 trillion in home values had been lost since the first of the year and all indicators show that home values are continuing their decline in most areas through the fourth quarter.

The firm’s other mortgage hedge funds including the Aqueous Fund, Composite Fund, Parmenides Fund and Structured Servicing Holdings are also all up between 6.24% to 19.82% through October. SPM’s only black sheep this year is the Directional Mortgage Credit Fund, which purchases highly rated paper (triple-A and double-A rated) at a discount. That fund is down 43.64%.

All told, SPM currently manages some $1.4 billion in hedge fund assets.


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